(UNTITLED)

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP97-00771R000707080001-0
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 34
• Document Creation Date: January 12, 2017
• Document Release Date: September 30, 2010
• Sequence Number: 1
• Publication Date: July 13, 1984
• Content Type: REPORT

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Directorate of
Intelligence
Weekly
International
Economic & Energy
13 July 1984
SeereI
Sea, I- wj
DI IEEW 84-028
13 July 1984 Q
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International
Economic & Energy
Weekly F-
13 July 1984
Synopsis
1 / Perspective-Narcotics Trafficking: Avenue to Economic Power
Energy
International Finance
Global and Regional Developments
National Developments
International Financial Situation: Impact of Interest Rate Increases on LDCs
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23 W6rld Cotton: China's Emerging Role
Shrinking Export Market for Jet Combat Aircraft
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Comments and queries regarding this publication are welcome. They may be
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13 July 1984
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International
Economic & Energy
Weekly
Synopsis
1 Perspective-Narcotics Trafficking: Avenue to Economic Power
Most recent estimates put the street value of illegal drugs sold annually in the
United States in the range of $50-75 billion, an amount equal to at least 4 per-
cent of all recorded US retail sales. These cash revenues give enormous
economic power to the criminal organizations handling this trade and contrib-
ute to mounting gray market economic activity in source and transit countries.
15 International Financial Situation:-Impact of Interest Rate Increases on LDCs
We estimate that the increases in interest rates thus far in 1984 will add about
$8 billion to total LDC debt service over a 12-month period. The net effect on
the overall LDC current account position will be only about $6 billion
annually, however, because of a $2 billion increase in interest earnings on LDC
floating-rate deposits.
17 Chile: Weighing Economic Options
Concerned by the potential for greater political unrest, Chile's new economic
team probably will opt for government spending this year in excess of IMF
guidelines.
23 World Cotton: China's Emerging Role
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In the past 12 months, global cotton consumption has outrun production,
pushing prices to a three-year high and triggering stock reductions. Moreover,
China has emerged as a potentially important exporter. F__~ 25X1
27 Shrinking Export Market for Jet Combat Aircraft
Large inventories, serious foreign exchange constraints by many potential
buyers, and the high cost of new jet fighters suggest that export demand for jet
combat aircraft will decline by a third in the 1984-93 period compared with
the previous 10 years.
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Perspective
International
Economic & Energy
Weekly
13 July 1984
Narcotics Tricking:
Avenue to Economic Power
ond-largest illicit business, according to the IRS.
By almost any measure, the illicit narcotics market is immense. Most recent
estimates of the street value of illegal drugs sold annually in the United States
alone are in the range of $50-75 billion, an amount equal to at least 4 percent
of all recorded US retail sales. Revenues from illegal drugs in the United
States far exceed drugstore sales or the retail value of all alcoholic beverages.
They are at least twice as large as the proceeds from illegal gambling, the sec-
Each year some $5 billion to $15 billion of these drug revenues flow abroad, ei-
ther temporarily to be laundered for subsequent legitimate investment in the
United States, or permanently for expenditure or investment abroad. This
money constitutes only a small share of total capital movement into and out of
the United States and an even smaller fraction of financial flows through the
international banking system. Nonetheless, this movement of drug revenues
places enormous financial resources in the hands of the Sino-Thai, Mexican,
and Colombian traffickers, and traditional organized crime groups largely
responsible for supplying drugs to the US market. We believe the repatriated
earnings of these groups account for almost two-thirds of the drug money
moving out of the United States each year.
Because so much of the drug money leaving the US market passes initially
through one of the offshore financial centers in the Caribbean, Latin America
is now the major financial crossroads for the illicit narcotics trade. Another
important reason for Latin America's prominence as a drug money corridor
has been the emergence of the region-originally an exporter primarily of
marijuana-as a principal source of several drugs. Mexico has joined Asia as a
major heroin producer; and sales of cocaine, produced almost entirely in the
Andean countries, have been outstripping those of other drugs.
To move drug money through international channels, trafficking organizations
use a number of underground international financial networks capable of
transferring large sums quickly and secretly over long distances. These
networks include the money exchange houses of Latin America, the Chinese
banking system operating through family businesses in ethnic Chinese commu-
nities, and the financial arm of organized crime. Not surprisingly, the
managers of these gray money facilities expertly evade exchange and banking
regulations and exploit bank secrecy and liberal corporation laws of offshore
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banking centers. They are equally facile at handling a wide variety of other
clandestine financial operations, such as illegal capital flight and the financing
of smuggled goods, including arms.
The all-cash drug trade and the underground financial networks that service it
help sustain the dollar-fueled gray economies now prevalent in many countries.
The most clearly affected regions are the northern-tier Latin American
countries, where the US dollar is as or even more acceptable than local
currency; Italy, where an estimated 25 percent of all transactions occur outside
the recorded economy; and Burma, where more than half of all economic
activity may be gray.
The enormous recession-proof incomes generated by trafficking organizations
make them an economic force to be reckoned with in the formal economies of
countries where the illicit drug trade originates or transits. The most
conspicuous example is Colombia, where traffickers' earnings from the illicit
sale of marijuana and cocaine are equivalent to 70 percent of all recorded
exports of goods and services and where investments financed by the share of
these earnings that is repatriated dominate many local economies. In Mexico,
where the drug trade is dwarfed by other economic activity, there is evidence
that traffickers are now sought-after business partners because of their access
to foreign exchange held abroad. Even in Italy, attributing
the growing legitimate economic power of the Mafia to proceeds from heroin
sales.
The financial power of the drug trafficking groups is almost certain to grow.
Most recent evidence indicates an increased supply worldwide of both heroin
and cocaine. Traffickers are attempting, with some success, to expand their
market for these drugs, particularly in Western Europe, Australia, and several
Arab countries. They are also limiting the access of newcomers to their
markets and sources of supply by moving toward further vertical integration.
The new markets and a greater command of retail markups in older ones
should result in substantially larger revenues for already-powerful criminal
groups.
Although several West European countries take strong antitrafficking meas-
ures and support crop control in source areas, the United States is the only na-
tion attempting to disrupt the enormous flow of illegal assets generated by the
narcotics trade. Switzerland is the only international financial center cooperat-
ing with the effort. In 1977 the United States and Switzerland signed a Treaty
of Mutual Assistance on Criminal Matters, and the Swiss have since become
increasingly responsive to US requests for court-admissible information relat-
ed to drug money cases.
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Cooperation from other money centers may be slow. The most likely candi-
dates are international "investment centers, either actual or emerging, which
like Switzerland have a varied business and an international image to uphold.
The least likely are the small offshore banking centers with tight bank secrecy
laws that serve primarily as transit points for international money. As relative
newcomers to the banking scene, they can easily be supplanted by competitors
and therefore fear the loss of business from lessened bank secrecy at least as
much as the stigma of becoming known as a dirty money crossroads. In the
long run, multilateral action may be necessary to prevent increases in
trafficking groups' already considerable economic power and almost certainly
will be required to barricade the drug money escape route.
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creased Persian Gulf
Energy
Persian Gulf oil exports last month rebounded to about 9.6 million barrels per
Oil Exports
day-up an estimated 1 million barrels per day over May levels.
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Tokyo signed a short-term contract with Riyadh for 10-12
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million barrels of Saudi oil in June, partly offsetting reduced Japanese
purchases of Iranian oil. The Japanese purchase accounts for about half the
600,000-barrels-per-day increase in Saudi exports. Iran's sales in June were
also up about 300,000 barrels per day from May's, when Iraqi air attacks
disrupted tanker loadings at Khark Island.
The increased Saudi exports probably reflect the delayed loading of some
tankers originally scheduled to enter the Persian Gulf in May. Some of the
crude may also be destined for Saudi oil stockpiles outside the Gulf. Tehran's
decision in June to lower oil prices-offsetting previous increases in freight and
Persian Gulf: Oil Exports a
a Estimated, including natural gas liquids (NGLs) and refined
petroleum products.
b Revised.
c Iraqi oil exports, averaging about 900,000 barrels per day over the
last three months, are made almost entirely through the Iraq-
Turkey pipeline-to the Mediterranean.
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insurance costs for tankers calling at Khark Island-brought a quick response
from European traders and balanced the loss of Japanese sales. Current
Iranian oil exports of about 1.8 million barrels per day are at 1983 levels.
Declining Persian Gulf Rates demanded by tanker owners for carrying oil from Persian Gulf terminals
Iran. Reduced chartering costs will diminish pressure on exporters such as Iran
and Kuwait to further discount prices of their crude.
Although Iraq attacked two
tankers near Khark Island during the last week of June, rates for liftings from
that terminal have dropped to $2.05 per. barrel, down almost 20 percent from
an 11 June peak of $2.50 per barrel. Rates from Kuwaiti and Saudi ports on
the upper Gulf have fallen 35 percent, from a peak of $1.75 per barrel in mid-
June to $1.10 per barrel at the end of the month. Rates for voyages from lower
Gulf Arab ports, which peaked at $1.15 per barrel on 17 June following Iran's
first attack on a tanker in the lower Gulf, dropped 25 percent to 86 cents per
barrel on 9 July-despite a second Iranian attack in the lower Gulf on 5 July.
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The drop in rates from.upper Gulf Arab terminals can be attributed in part to
the halt in Iranian attacks in the upper Gulf since 24 May. Another factor,
which may help explain the drop in rates at Khark Island and Arab ports as
well, is the return to service of laid-up tankers by owners seeking to profit from
the still high rates available in the Gulf. From mid-May to mid-June, 18 large
tankers with a combined capacity of more than 3 million deadweight tons
came out of layup to seek business in the Gulf. No major changes in war-risk
insurance rates have been confirmed since rates for Khark Island rose to
record levels on 25 May and charges for lower Gulf ports went up on 11 June.
A plan to reduce Khark rates was scrapped after Iraq renewed attacks on
shippng on 24 June.
Iraq-Turkey Pipeline The second-stage expansion of the Iraq-Turkey pipeline to 1 million b/d is
/ Expansion expected to be fully operational by 20 July, according to
the Turkish press. The extra capacity could generate an additional $1 billion
per year in revenues for Iraq if oil flows can be maintained. The estimated
100,000-b/d increase in crude oil throughput, however, will require operating
pressures to be raised above current levels, making the pipeline more
susceptible to leaks. Turkey, in an effort to minimize leaks, is inspecting the
structural integrity of its portion of the pipeline. Unless Iraq makes a similar
survey and restores war-damaged sections of its pipeline that have been
repaired with quick fixes, Baghdad will run a high risk of a serious rupture.
The Iraqi lines suffered several breakdowns in late 1983 and early 1984 during
the first phase of the pipeline expansion.
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Charter Rates have fallen, despite the renewal of attacks on crude carriers by both Iraq and
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United. Kingdom and
Norway Discuss
Sleipner- Gas
Gas Corporation (BGC), rather than by their respective governments.
The British Minister of State for Energy, Alick Buchanan-Smith, recently
visited Oslo to convey to the Norwegian Government the proposed British
modifications to the Sleipner gas sales agreement. Contrary to earlier press
reports and industry speculation, the United Kingdom apparently did not
suggest an absolute reduction in the volume of gas to be purchased, but rather
an extension of deliveries over a longer period of time, according to US
Embassy and press reporting. Because this proposal would reduce the cash-
flow to the field's partners-Statoil, Esso, and Norsk Hydro-we do not
expect that the partners will agree to this modification unless other features of
the contract, including the price, are also altered. Press reporting indicates
that Oslo's reaction to the proposed changes was negative, and Norwegian
Energy Minister Kristiansen confirmed earlier official statements that any
modifications to the agreement will be negotiated by Statoil and the British
Norwegian pipeline.
We believe Statoil and BGC will work together to try to renegotiate the
contract-albeit at a higher price. Discussions on the proposed changes could
be lengthy, however, and it remains unclear whether London will approve a
modified agreement that calls for a higher base price. Furthermore, we expect
substantial opposition from Statoil to an additional British proposal that
condensate from the Sleipner field be landed via a British pipeline instead of a
Soviets Put Pressure The Netherlands' Gasunie has cut gas prices by 15 to 20 percent on sales to
on Dutch Gas Prices Belgium's Distrigaz. The price cut, which applies only to gas destined for
Belgian chemicals manufacturers, will remain effective until 1 October 1984
and involves about 500,000 cubic meters, or 10 percent of Distrigaz imports
from Gasunie. We believe The Hague has shown price flexibility to counter
Belgian chemicals manufacturers' criticisms of uncompetitive pricing and to
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Ottaw Passes Nova
Scotia Offshore
Le slation
lion-cubic-meter Belgian gas market.
blunt Soviet attempts to sell gas to Belgium. The Dutch-Belgian gas supply
contract is up for renegotiation this fall, and Brussels has not yet ruled out So-
viet gas purchases after 1 October. As a result, Dutch producers may be forced
to make further price concessions to retain their 60-percent share of the 8-bil-
Legislation recently passed in Ottawa and Halifax activates the Ottawa-Nova
Scotia Energy Agreement of 1982 and establishes an Offshore Oil and Gas
Board to oversee energy exploration and production activities in the waters off
Nova Scotia. The Board will have three federal and two provincial members,
indicating that Ottawa will retain final decisionmaking authority over develop-
ment. On the other hand, the Agreement gives the economically depressed
province the lion's share of revenues derived from offshore energy produc-
tion-Ottawa's share of these revenues will increase only after Nova Scotia's
per capita tax revenue exceeds 110 percent of the national average. Some of
Nova Scotia's revenues will come from the participation of the provincially
owned oil company, Nova Scotia Oil and Gas, in offshore development. Under
the existing National Energy Program, Ottawa has the right to a 25-percent
retroactive share, or "back-in," in all energy activity on federal lands. The new
legislation, however, allows Nova Scotia Oil and Gas to purchase up to half of
the federal government's interest in a natural gas field and up to one-fourth of
Several oil companies and foreign governments have criticized the retroactive
nature of the "back-in" provision. Indeed, Conservative Leader Mulroney has
described it as punitive and confiscatory and has promised to eliminate it if his
party wins the election in September. Mulroney, however, probably would be
unable to change it significantly because modifications would have to be
approved by both federal and provincial lawmakers. Nova Scotia Premier
Buchanan estimates the revenue accruing to the province from the Venture
natural gas field alone will be more than $4 billion (US) over the field's
productive life, and he would stoutly resist changes without compensation from
Brazil Reduces Oil According to US Embassy reporting, Brazilian oil production reached a record
Import Bill last month of 500,000 b/d. The production increase, coupled with a substantial
billion last year and should be in the $5-5.5 billion range in 1984.
drop. in domestic oil consumption, should enable Brasilia to cut net imports to
under 500,000 b/d this year. Net oil imports already had declined from an
average of 780,000 b/d in 1981 to about 620,000 b/d in 1983. As a result,
Brazil's net oil import bill has declined from about $9.7 billion in 1981 to $6.7
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The hilippines Calls
d Donors Meeting
tium was not scheduled to meet until next January.
Manila last week invited 21 bilateral and 11 multilateral aid donors to a
meeting on 24-25 July to discuss the economy and review foreign assistance
levels. The meeting began as a proposal by the Asian Development Bank for an
informal meeting of technical-level staff but has been transformed by Presi-
dent Marcos into a formal and highly publicized gathering. The aid consor-
to easier terms for a long-stalled $650 million standby loan.
Convening the donor community serves two purposes for Marcos. First, by
appearing to take a leadership role in resolving Manila's foreign debt crisis, he
wants to outflank his domestic political opponents, who have contended that
his government is bowing to IMF dictates. Second, by appealing directly to the
donors, Marcos is hoping that the meeting will pressure the IMF into agreeing
ortuguese Eurodollar Lisbon has decided to increase its Eurodollar borrowing from $300 million to
Syndication a Success $400 million after receiving more commitments: than anticipated.. Last year's
July, enabling Lisbon to draw on the loan in August.
dramatic improvement in the current account deficit-it was halved to $1.7
billion-and the recent revision of targets in its IMF standby agreement
undoubtedly encouraged bankers to increase their exposure in Portugal.
International banks also provided slightly more favorable terms. The new,
seven-year loan is priced at 0.75 percentage point over LIBOR for the first
three years and 0.875 point over LIBOR for the remaining four years, whereas
the spread on last December's credit was 0.875 of a point over LIBOR.
According to the US Embassy, the loan probably will be signed at the end of
Global and Regional Developments
New Mineral- new investment strategies are emerging
Investment Strategies in the world minerals markets. Mineral exploration and development plans are
being redirected primarily toward multimineral projects that lower production
costs while reducing the risks of volatile. price swings for individual metals. As
a result of this shift, new mineral projects are likely to take one of the
following forms:
? Development of ore bodies that contain precious and high-value strategic
metal byproducts.
? Investment in facilities that recover these high-value metals from mine
tailings.
industrial minerals used for construction, chemicals, fertilizers, or ceramics.
? Development of metals that have low processing costs, such as certain
Income for precious-metal, byproducts can be critical to the profitable
operations of many lead,.zinc, and. copper mines. Industry analysis shows that
byproduct revenues reduced net copper production costs by 25 to 30 cents per
pound in the early 1970s and by 50 cents on average in the early 1980s, when
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the Zimbabwe's Mineral Development Corpora-
Continues To Improve tinuing increase in exports pushed the surplus in the first quarter to over $50
erage price levels during the 1970s.
precious-metal prices soared. Although precious-metal prices have since fallen
sharply, silver and gold are still nearly double and triple, respectively, their av-
Examples of the multimineral approach are beginning to appear. Papua New
Guinea recently opened its new $1.2 billion OK Tedi mine. Initially, only gold
is being produced, but by the late 1980s, copper and byproduct molybdenum
will be mined. a Mexican firm has begun
processing spent copper mine tailings to recover gold and silver. Using a new
precipitation process, the five-year project could yield $100 million worth of
gold with the Mexican Government receiving 30 percent of the proceeds.
tailings.
tion (MDC) is seeking funds to build a pilot plant to extract lithium from mine
Trade Balance of The overall trade surplus for 14 key LDC debtors resumed its upward trend in
Debtor Countries first quarter 1984 after a slight pause in the final quarter of last year. The con-
billion on an annual basis. For the group as a whole, foreign sales rose 5
percent over the previous quarter on a seasonally adjusted basis. On the basis
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Key Debtor Countries: Trade Balances a Billion US $
1982
1983
1984
First Quarter b
Philippines
-3.3
-3.1
-1.6
South Korea
-2.5
-1.9
-2.2
Venezuela d
4.8
8.6
6.6
a Exports f.o.b. and imports c.i.f.
b Seasonally adjusted at an annual rate.
c Estimated from preliminary partial data.
d Based on imports derived from OECD exports to the country.
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begin to rise more rapidly
Ecuador, and Venezuela also posted export gains, but increased imports
resulted in a worsening in their trade balances over the previous quarter.
of data on trade with OECD countries, we estimate that Nigerian exports rose
more than 40 percent as Lagos pushed oil exports beyond its OPEC quota.
Brazilian and Mexican sales climbed 17 and 14 percent, respectively. Chile, 25X1
LDC exports should continue to rise in response to the OECD economic
expansion. A further increase in the overall trade surplus of these debtor
LDCs, however, will depend on the extent to which these countries continue to
constrain imports. Given the extremely low levels to which these countries'
imports have been pushed-the first-quarter import level for the 14 countries
as a group was 22 percent below the 1982 level-we believe imports could soon
National Developments
Developed Countries
South African Rand The value of the South African rand hit a record low of 66 US cents on Mon-
Hits Record Low day, a 10-percent drop from the previous week. The rand has been hurt by the
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falling price of gold-which generates one-third of South African foreign
exchange earnings-and by the strength of the dollar. The price of gold fell
below $340 per ounce last week, down from $395 as recently as March. By al-
lowing the value of the rand to float downward, South African authorities hope
to improve the foreign payments this year, even though this could stop
economic growth. The fall in the value of the rand will reduce imports and will
push South Africa's 10-percent inflation rate back toward last year's peak of
15 percent. We expect the lower price of South African goods abroad to
stimulate an increase in nongold exports, but most of this benefit will be
delayed until 1985 because of contractual commitments and a shortage of
exportable agricultural goods, a result of three consecutive years of drought.
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Australia To, Allow The ruling Labor Party, at its national conference this week, approved
Foreign Bank Entry Treasurer Keating's controversial proposal to allow foreign commercial banks
to operate in Australia. The terms of the agreement require that applications
be examined on a case-by-case basis, that Canberra attempt to secure a
minimum of 50-percent local equity-as with other foreign investment-and
that banks be established as subsidiaries with independent capital bases rather
than as branches of the parent institutions. The Cabinet will not officially vote
on the proposal until late September or October, and licenses are not likely to
be granted until the end of the year.
Less Developed Countries
N'~araguan Shipping Nicaragua continues to encounter difficulties with its ocean shipping trade
/ifficulties Continue operations at its main foreign trade port of Corinto. Ships entering Corinto
have suffered delays because of both cargo discharge problems and port
congestion. Where normal turnaround time for liners was three days, prior to
the mining incidents of last spring, 'it is now about six days. The principal
causes for the delays derive from the poor condition of cargo-handling
equipment, labor shortages, and continuing concerns that mines are still in the
harbor. Until repairs are made, maintenance is improved on the cargo
handling equipment, and the peak agricultural export season has passed,
congestion at Corinto will persist.
Glimmer of Optimism A mood of cautious optimism is spreading in Beirut with the reopening of the
Abq(t Lebanese airport and the port this week. The US Embassy reports that the Lebanese
F/onomy pound appreciated more than 2 percent against the US dollar early last week
as the government's security plan was put in place. Many businessmen,
however, will probably wait until the security plan holds awhile before making
repairs and expanding output. Meanwhile, a US Embassy officer who recently
traveled to northern Lebanon reports that, with the exception of some factory
closings in recent months, the area's economy is prospering. There is a great
deal of new construction, road repair and maintenance is under way, electricity
service is generally reliable, and municipal services run smoothly.
Kenyan Budget
Problems
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Severe drought is likely to derail Kenya's budget, which was released only a
month ago. The government had anticipated a $340 million deficit, $20 million
higher than last year, but still only 5.2 percent of GDP. Now, however, sharply
lower coffee and tea production is expected to reduce export duty earnings,
and import duties and sales taxes will fall as the government imports food at
the expense of other products. Drought-associated expenditures could total
$430 million, according to the US Embassy, far in excess of the $35 million al-
located in the.budget. Nairobi has started to slash proposed development
spending and is asking major foreign aid donors to increase aid commitments.
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Denationalization and The Bangladesh Government's two-year-old denationalization program has
the Private Sector produced some .benefits, but the overall business climate remains depressed.
in angladesh According to the US Embassy, the government's return of the key jute and
textile industries to the private sector has resulted in better management and
Six new private banks have
rovements in productivity and income
im
.
p
facilitated foreign trade and offered businessmen personalized services un-
matched by public-sector banks. There has not been a dramatic increase in
overall investment in the economy, however, and a recent large labor
settlement and general concern about the stability of the government have
contributed to the lack of business confidence. Moreover, with more than-85
percent of the population dependent on agriculture, improvements in private
business and industry have relatively little impact on Bangladesh's overall
living standards.
Hungary Meeting IMF Budapest expects a favorable review by the IMF of its financial stabilization
Ijetfu-irements program next month, but it will have to restrain economic activity at least
through next year. The Hungarian National Bank official responsible for
relations with the IMF told the US Embassy recently that Hungary has
complied with most of the criteria in the stabilization program. Since the
beginning of the year, Budapest has removed many of the import restrictions
introduced in 1982, devalued the currency roughly 8 percent against the US
dollar, and raised domestic interest rates. The official admits that the IMF re-
mains concerned about excessive activity in the legalized private sector. He
says real incomes there are increasing at an annual rate of 32 percent, and real
incomes in the socialist sector are declining. In addition, the official notes that
Hungary is making only slow progress in meeting the IMF's instruction to
reduce the amount of its short-term foreign debt. Nonetheless, he does not
foresee any major problems over these issues. He claims that, because of
adequate lending by Western banks, Budapest can use the remaining IMF
credits available this year to build up its foreign exchange reserves.
The IMF almost certainly will give Hungary a favorable evaluation, despite
some reservations about its performance. In addition to meeting most program
targets, Budapest has kept its promise to introduce a new comprehensive
economic reform package. Large debt service obligations through-at least next
year, however, will require Budapest to continue to restrict domestic demand
and hard currency imports. Growing social tension over the wide disparity in
incomes between the private and social sectors is putting additional pressure on
the authorities to contain private activity. Although Budapest may take
limited measures, it remains reluctant to clamp down on the most productive
and innovative sector of the economy.
13 Secret
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Vietnamese Economy
Show's Growth
real GDP rose 5.9 percent last year. This is
Secret
13 July 1984
metric tons, allowing Hanoi to eliminate nearly all food imports.
down from the 8.2-percent growth in 1982 but far better than the declines re-
corded in 1979 and 1980. The introduction of producer incentives in 1980-81,
some decentralization of economic control, and a period of good weather have
spurred performance in industry and agriculture. Industrial output-largely
handicrafts and light industry-increased by 15 percent in 1983, and produc-
tion of cement and basic consumer goods for the domestic market also rose. In
addition, food-grain production increased 2.4 percent to a record 16.8 million
Despite these improvements, Vietnam remains one of the world's poorest
countries, with a per capita income of less than $200. The outlook for 1984 is
for slower growth. Early bad weather and a shortage of diesel fuel for
irrigation pumps have damaged the rice crop in the north. Hanoi's growing ar-
rears on its $1.5 billion hard currency debt will limit imports of fertilizer, other
raw materials, and spare parts. Moreover, in an attempt to limit the
burgeoning free market, Hanoi recently has rescinded some economic liberal-
ization measures and sharply increased taxes. These actions are likely to
discourage production.
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International Financial
Situation: Impact of
Interest Rate Increases on LDCs
Rising world interest rates continue to aggravate
burdensome LDC debt service costs and could
prolong the economic adjustment efforts of individ-
ual countries. With the US prime rate now at .13
percent and the three-month LIBOR slightly above
12 percent, interest rates are at their highest level
since mid-1982 and are about 2 percentage points
higher than at yearend 1983.
We estimate that the increases in interest rates
thus far in 1984 will add about $8 billion to total
LDC debt service over a 12-month period. The net
effect on the overall LDC current account position
will be only about $6 billion annually, however,
because of a $2 billion increase in interest earnings
on LDC floating-rate deposits. The recent interest
rate hikes will be felt primarily in 1985 because
base interest rates on floating-rate loans generally
are set only every three to six months. Moreover,
further changes in world interest rates would adjust
the impact accordingly.
Impact on Individual Debtors
Although the share of total LDC debt that is on
floating rates is nearly 60 percent, the average for
10 major debtors-Argentina, Brazil, Chile, Indo-
nesia, South Korea, Mexico, Nigeria, Peru, the
Philippines, and Venezuela-is about 75 percent.
For all remaining LDCs, the floating-rate portion
of total debt is only about 30 percent because those
countries-mostly in Africa and South Asia-rely
heavily on fixed-rate, loans from official sources and
have limited access to floating-rate loans from
private sources.
Mexico and Brazil will feel the biggest impact in
dollar terms by higher interest rates; the 2-percent-
age-point rise since yearend 1983 will add about
$1.6 billion to each country's debt service costs in
1985. Other debtors, such as Venezuela and Chile,
have in excess of 85 percent of their total debt
based on floating rates and will be hard hit relative
to most other debtors. In all cases, however, the
impact of the interest rate increases on these
countries probably will be substantially less than
the impact of the 20-percent increase in US im-
ports projected for 1984 by the OECD. We esti-
mate that for each 1-percent rise in US imports,
assuming constant trade shares, LDC exports in-
crease by $1 billion.
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Estimated Impact of a 1-Percentage-Point
Change in World Interest Rates a
Total Debt Floating-
Yearend 1983 Rate
Debt
a Figures indicate the impact over a 12-month period, beginning
three to six months after the increase in interest rates.
mildly.
The most recent half-point increase in the US
prime rate provoked a flurry of criticism in Latin
America, especially from the press:
? The most strident official comment came from
Mexican Finance Minister Silva Herzog, who
termed the action a reprisal for convoking the
meeting at Cartagena.
? An Ecuadorean official interpreted the rate hike
as-a "provocation," and Venezuelan President
Lusinchi called it an assault on the debtor
countries.
? Chile, Bolivia, and Brazil- criticized the interest
rate increase, but their official comment was
restrained.
? The Argentines, who were embroiled in negotia-
tions with the IMF and bank creditors, reacted
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13 July 1984
Impact Floating- Impact on Net Impact
on Debt Rate Deposits on Current
Service Deposits Account
Despite the generally subdued responses, many
Latin officials indicated that it was regrettable that
the increase came on the heels of Cartagena, and
that the rate hike may yet cause debtors to consider
a more confrontational approach. Some officials
stated that the recent increase makes it imperative
for the debtors to remain united because interest
rate hikes are undermining the adjustment process
and the ability to service debts. Peru stated that
higher debt service costs threatened its ability to
maintain compliance with its IMF-supported ad-
justment program.
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Chile: Weighing
Economic Options
Concerned by the potential for greater political
unrest, Chile's new economic team probably will
opt for government spending this year in excess of
IMF guidelines. President Pinochet has come to
regard the struggling economy as a significant
threat to political stability, and Finance Minister
Escobar seems willing to accept a near doubling of
inflation to 40 percent in the hope of bringing
unemployment down 2 percentage points to 13
percent. We believe that with greater stimulation
Chile might achieve 4-percent growth'in 1984, but
at the cost of at least 35-percent inflation and the
ill will of foreign bankers. Moreover, recovery
would probably falter in 1985 if lenders restricted
access to trade credits. In the less likely event that
Santiago risks popular discontent by keeping within
IMF guidelines, our projections show the economy
would grow only 2 percent this year, inflation for
.the year would drop below 20 percent, and relations
with creditors probably would not deteriorate.
Regardless of which policy Santiago adopts, Chile
will seek to boost copper exports-dampening in-
ternational copper price increases. In addition,.
Pinochet has reacted to the threat of US import
restrictions on copper and to rising interest rates-
US banks hold half of the Chilean $11 billion
private debt-by making veiled threats of a debt
moratorium and support for a debtors club.
After a 14-percent plunge in economic activity in
1982, Chile gradually reflated the economy last
year to try to assuage domestic discontent while
complying with its IMF standby agreement. Santi-
ago refinanced domestic debt to ease financial
constraints on strapped firms and doubled tariffs to
20 percent to limit import competition. Subse-
quently, the government increased public salaries 5
IMF Growth
Program Option
Unemployment,
yearend
11
24
16
13
15
Monetary expansion
7.5
-8.1
39.0
33.0
50.0
Public-sector deficit
(as a share of GDP)
-0.8
3.4
3.1
5.6
6.6
a Growth rates calculated from December to December of the
stated year.
b Projected.
percent, announced new public spending that would
create 160,000 jobs, and provided aid to small
businesses and farmers. Nonetheless, Santiago
complied with the terms of its IMF program and
drew upon Fund credits to support its strategy.
This strategy sparked recovery, and by the fourth
quarter of 1983 the economy was growing'at an .
annual rate of 6 percent. (For the year, real output
declined 0.8 percent.) The rebound late in the year
pushed unemployment down from 24 percent in
December 1982 to 16 percent last December, while
inflation rose from only 21 percent in 1982 to 23
percent in 1983. Despite a 20-percent increase in
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net foreign interest payments, Chile's current ac-
count deficit was reduced 40 percent to about $1.4
billion in 1983. Improvements in the external ac-
counts and compliance with its IMF-supported loan
program enabled Santiago to reschedule foreign
commercial bank loans and raise $1.3 billion in new
money.
Pressing Political Realities
Despite some economic improvements, political dis-
content continued last year in the form of rallies,
marches, and scattered violence aimed against the
government. According to US Embassy reports,
most Chileans suffered real wage cuts in 1983 of 4
percent, on top of the 8-percent drop in 1982.
Moreover; the slow recovery resulted in further
bankruptcies and an increasing number of bad
surged in March by 2.5 percent, unemployment
rose to slightly above 15 percent, and opposition
protests resumed. Pinochet on 2 April dismissed
Caceres and his economic team.
The new Finance Minister, Luis Escobar, took
office
publicly _:: announcing plans to stimulate the economy. He
organized a forum of businessmen and workers to
advise Pinochet on steps to reactivate the economy,
and asked the IMF for an increase in the 1984
budget deficit from 4.8 to 5.6 percent of GDP to
help finance his program. Escobar abandoned plans
to dismantle the public works programs, and in-
stead talked about doubling wages for those in the
programs and lending funds to the provinces to
increase em to ment.
debts.
With living standards under stress and opposition
protests continuing, pressure mounted for the adop-
tion of even more growth-oriented policies.
The moderate opposition-
primarily the Christian Democrats-also called for
reducing unemployment through increased state
spending on housing, mining, and public works
projects. Press and US Embassy reporting indicate
domestic businesses were pressing for further debt
relief and faster economic growth.
Despite these domestic pressures, Caceres contin-
ued to pursue only cautious expansionary policies
into 1984. Sticking to the terms of Chile's IMF
accord, Caceres aimed at achieving 4-percent
growth while keeping inflation under 20 percent.
Although cautious reflationary policies reassured
creditors, they did not produce the quick economic
improvements Pinochet expected. After inflation
Although Santiago attempted to assure creditors
that Chile would honor all international debts and
remain within IMF spending limits, bankers doubt-
ed that Chile could enact more rapid growth
policies and service the foreign debt. As a result,
many banks balked at participation in a new $780
million loan. The bank advisory committee sus-
pended the loan syndication in mid-April. With
Chile's trade surplus narrowing in the January-
April period, Chile's foreign exchange position was
squeezed, and Santiago tried to tap credit lines at
foreign banks to prevent a loss of reserves, accord-
ing to the US Embassy.
In recent weeks, Escobar has attempted to reassure
bankers that Chile would meet IMF targets for the
first half of the year, and that he would continue to
pursue a moderate course in return for continued
financial-support. Before his June trip to Washing-
ton for discussions with the IMF, Escobar told a
US Embassy officer that he was fighting cabinet
moves to undermine strict compliance with Fund
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13 July 1984
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Secret
conditions. Bankers responded favorably to Esco-
bar's assurances by agreeing to complete syndica-
tion of the $780 million loan, and Chile obtained
the first $390 million.on 28 June.
The Outlook at Midyear
Chile's economic team is facing domestic pressures
to relax spending restraints while increasing gov-
ernment investment. These pressures include popu-
lar resentment against austerity, particularly
among the unemployed. In addition, rising interest
rates on the foreign debt and possible import
barriers against Chilean copper are threatening to
reduce foreign exchange earmarked for recovery
efforts. President Pinochet has in turn suggested
new approaches to debt repayment and left open
the possibilities of a debt moratorium or creation of
a debtors club.
Santiago may yet opt for staying the IMF course to
engineer a steady recovery and maintain harmoni-
ous relations with creditors. We believe, however,
that the chances are greater that the government
will decide to seek faster growth to alleviate domes-
tic discontent. Although we judge the differences
would be slight in near-term economic performance
under either scenario, there are strikingly divergent
longer run consequences.
IMF Route. We believe there is slightly less than
an even chance that Chile will adhere closely to
IMF guidelines. The Fund probably will soon grant
approval for Santiago to expand its deficit from 4.8
percent to 5.6 percent of GDP in the second half of
1984, unless Chile diverges markedly from other
guidelines. Santiago would use the additional pub-
lic-sector spending to stimulate the economy. For
example, ENAP-the state oil company-wants to
invest $150 million this year, $20 million more than
last year, to help alleviate unemployment and cut
oil imports.
By complying with the IMF program, we believe
Chile would remain in the economic doldrums.
Domestic credit would remain tight; according to
US Embassy reports, new government bond issues
would crowd out private investment activity. In our
opinion, GDP growth for 1984 would be held to 2
percent, unemployment would remain at 15 per-
cent, and inflation would drop to 20 percent. The
current account deficit, however, probably would 25X1
exceed the $1.3 billion IMF target. Copper export
earnings and foreign direct investment are falling
short of expectations, and interest payments have
risen. As a result, Chile would have to draw down
at least $300 million of its $2 billion in gross
foreign reserves.
If Santiago sticks with the IMF agreement, it
probably will retain the support of the Fund and of
the international banking community. Until copper
exports strengthen, Chile will need new loans to
finance its current account deficit and for invest-
ments in the extractive industries.
Faster Growth Option. We believe it is more likely,
however, that Pinochet will bow to concerns over
high unemployment and the threat of more demon-
strations. We expect he will order bolder govern-
ment action to spur the economy. These policies are
likely to lead to government spending that will
increase even faster than the relaxed IMF guide-
lines would allow. The public-sector investment and
the public works programs that would be initiated
to increase employment would be a step away from
Chile's free market economic policies. To provide
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I
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the private sector with substantial new credits, the 25X1
government probably would finance a new domestic
debt relief plan by expanding the money supply
well beyond IMF guideline levels. Subsidies to
industry and agriculture also could proliferate.
These moves would stimulate the economy but push
inflation and the current account deficit above
Fund targets. Should current Finance Minister
Escobar hesitate to undertake aggressive reactiva-
tion measures, we believe he would be replaced.
We and several Chilean economic experts believe
that such policies would produce at best a 4-percent 25X1
growth in 1984, but at a cost of accelerating
inflation to at least a 35-percent rate by yearend.
The unemployment rate would drop only slightly to
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Million US $
-2,598
3,960
13 percent, probably insufficient to reduce signifi-
cantly the level of social discontent. In this scenario
the current account deficit would rise from $1.4
billion in 1983 to $1.7 billion as import demand
surges. Once Chile clearly violated the terms of its
IMF standby agreement, we would expect delays in
disbursement of the new loan. Strapped for foreign
exchange, the government could be forced to draw
down exchange reserves by 50 percent to $1 billion.
Longer Run Consequences
Regardless of which strategy the government pur-
sues, we believe Chile will need to increase both
domestic savings and new foreign borrowing to spur
investments and employment. In this regard, Santi-
ago plans a major expansion of copper production
to boost employment and increase foreign exchange
Secret
13 July 1984
earnings. According to press reports, plans call for
increasing copper production from 1.2 million met-
ric tons in 1984 to 2 million tons in 1988.
Pursuit of the growth option, however, is likely to
lead to conflicts with bankers and the IMF, re-
stricting Chile's access to the foreign lending neces-
sary to make such investments. Foreign banks
might restrict trade credits and Chilean businesses
would encounter growing difficulty in obtaining
imports to support industrial growth. Moreover,
foreign exchange stringencies might force Chile to
restrict profit repatriation, which will stem foreign
direct investment. More rapid inflation could un-
dermine the new domestic saving needed to sustain
growth.
Implication for the United States
With Chile banking on increased copper exports to
reactivate the economy and help service its foreign
debt, restrictions on sales in the US market would
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not lead Santiago to reduce planned production.
Instead, in our view, Chile would step up its sales
on the world market, depressing prices. This could
put US manufacturers who use higher priced do-
mestic copper at a disadvantage compared with
foreign manufacturers.
If US interest rates continue to rise, Chile's debt
repayment capability will be squeezed. We esti-
mate that a rise of 1 percentage point in the US
prime would increase Chile's current account defi-
cit by $140 million. According to the US Embassy,
rising interest rates and the threat of US quotas on
copper imports have moved Pinochet away from
assuring bankers of debt repayment to veiled
threats of a moratorium and support of a debtors
club. If Pinochet opts for a get-tough policy, US
bankers-holding half of Chile's commercial bank
debt-could find their loans subject to a debt
service moratorium by Chile.
21 Secret
13 July 1984
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Secret
World Cotton:
China's Emerging Role
The cotton marketing year that ends this month
experienced significant turbulence. With global
consumption outrunning production by 1 million
,bales, prices were pushed to a three-year high, and
exporters were forced to draw down stocks. More-
over, during the past 12 months China has emerged
as a potentially important cotton exporter. This
development portends trade problems for the
United States.
The Market Setting
The current market year (August 1983-July 1984)
has been characterized by disarray. Buyers found
supplies rapidly tightening as rising consumption
outpaced production. With the resurgence in the
world economy, global cotton consumption climbed
by 800,000 bales, reaching 68.6 million bales. In
contrast, world cotton output for the season totaled
only 67.6 million bales, about the same as last year.
To meet the pickup in demand, global cotton stocks
were drawn down by about 1 million bales. Cotton
stocks in the United States have dipped to 2.8
million bales, a two-and-a-half-year low. This, in
turn, led to a strengthening in prices, which are
now at their highest level since the first half of
1981.
This year's seller's market is likely to be reversed in
1984-85 as producers respond to high prices. The
US Department of Agriculture projects a 10-per-
cent increase in world cotton production to an
alltime high of 74 million bales. US production is
forecast to rebound by 50 percent over this year's
poor harvest. Gains also are likely in Pakistan,
Brazil, and Mexico because of an expected return
to normal weather and in Turkey and Argentina,
from increased plantings. With world consumption
10
expected to grow by only 3 percent, supplies should
be plentiful, allowing a buildup of stocks. This - 25X1
should ease pressure on prices after significant
volumes of the crop become available in October
and November. 25X1
. Emergence of China
In only four years, Chinese cotton production has
doubled, reaching a record 21.3 million bales,
nearly a third of global output. This impressive
growth is attributable to production incentives that
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Year a
Beginning
Stocks
Raw
Production
Consumption Exports
(Mill Use)
1978/79
26.1
59.6
63.3 19.7
1979/80
22.6
65.2
65.9 23.1
1980/81
21.9
64.8
65.7 19.7
1981/82
22.2
70.8
66.0 20.1
1982/83
25.6
67.5
67.8 18.7
1983/84
25.6
67.6
68.6 18.9
have spurred an expansion of area planted to
cotton, especially in northern China, and increased
use of chemical fertilizers. Increased availability of
improved seed varieties coupled with good growing
conditions, especially this season, also have contrib-
uted to six consecutive record harvests
In contrast, cotton consumption in China has ex-
panded only 3 percent a year during the last four
years, which has permitted China to cut imports.
During 1979-80, for example, China imported a
record 4.1 million bales, nearly 20 percent of the
cotton moving in world trade. This year China
probably will be a net exporter of 400,000 bales.
China probably will emerge as an important ex-
porter of cotton. This development could signifi-
cantly hurt US exports, especially to major East
Asian markets. Indeed, in 1984-85 China is likely
to harvest another bumper crop of about 20 million
bales. Although down slightly from this year's
record crop, China can draw on stocks of 7.2
million bales built up over the past few seasons as
Secret
13 July 1984
The Production Responsibility System has been a
key to increased cotton output, providing price
bonuses for over-quota production. In addition, for
cotton production above quota, farmers have been
given the right to purchase additional chemical
fertilizer to increase yields. Guaranteed grain ra-
tions for cotton producers were introduced to
encourage farmers to switch to fiber crops.
These policies have stimulated a sharp expansion
in land planted to cotton. The harvested area
jumped 23 percent over the last six years to a
record 6 million hectares this season. China's
northern provinces, particularly Shandong, Hebei,
and Henan, account for about half of this season's
record output. In contrast, procurement prices in
Central China have undervalued cotton relative to-
grain, and-as a result-cotton area and produc-
tion have remained relatively static.
For the 1984-85 crop, procurement policies have
been changed to slow the growth in cotton output
and to further shift production to the north. This
planned slowdown suggests that China may be
seeking to solve transportation and merchandising
bottlenecks. Under the new procurement system in
the northern cotton area, 20 percent of the cotton
will be bought by the government at the established
base price and the remainder at the increased
price. In the southern area, 60 percent will be
purchased at the base price and the rest at the
increased price. Farmers in both regions have been
assured that all above-quota production will be
purchased by the state.
well as on new crop surpluses to market as much as
1.0-1.5 million bales in 1984-85-about 5 percent
of the global cotton trade.
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China: Cotton Market Trends Million 480-pound bales
a Marketing year, 1 August through 31 July.
b Forecast.
In April, CHINATEX put out.
an international tender to sell nearly 460,000 bales
for May-October shipment. According to trade
reports, only slightly more than 20,000 bales were
bid on before the Chinese withdrew the tender on
15 April. The lack of response from foreign buyers
illustrates three problems that the Chinese will
have to overcome:
? Nonstandard bale size. The Chinese cotton bale
weighs only about 170 pounds as opposed to the
standard 480-pound bale, which is the norm in
world cotton commerce. As shipping, receiving,
and processing equipment is generally standard-
ized for 480 pounds, bids for the recent tender
were low because of the extra costs foreseen in
handling the smaller bales.
? Uncertainty about grades. The inconsistent quali-
ty of Chinese cotton has discouraged buyers.
? Lack of arbitration rights. The Chinese made the
unrealistic demand in their tender that buyers
waive arbitration rights.
system and developing buyer confidence. In addi-
tion, international cotton traders emphasize that
the Chinese will need to develop an equitable
arbitration system.
China appears committed
to becoming .a large consistent exporter of raw
cotton as demonstrated by the government's cur-
rent program to construct additional storage facili-
ties in cotton-growing areas and at transshipment
points.
Implications for US Cotton Trade
China's entry into the export market has adverse
implications for the United States:
25X1
? US cotton exports to China, which totaled
847,000 bales in 1981/82, dipped to only 20,000 25X1
bales during 1982/83 and are expected to be even
lower this season.
? China is a potential competitor with the United
States in the Pacific Basin. China's shipments to
its neighbors could seriously reduce US sales to
these markets.
According to press reports, US cotton producers
and exporters are extremely concerned, fearing
China's potential intrusion into large US cotton
markets in Hong Kong, Indonesia, Japan, South
Korea, and Thailand. These five markets accounted
for almost two-thirds of US cotton exports during
1982-83 25X1
According to the latest data, August-May ship-
ments to these markets totaled 3.2 million bales or
55 percent of US exports during this period. For
the year now ending, US cotton exports are expect-
ed to reach 7.0 million bales. For 1984-85, global
US cotton exports are expected to drop more than
20 percent to about 5.5 million bales, reflecting
sharply larger exports by US competitors and little
improvement in world trade levels. US Department25X1
Efforts by the Chinese to standardize bale size will
take time, as will improving their cotton-grading
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US Cotton Exports Thousand 480 pound bales
(except where noted)
Destination
Average
MY 1976/81
MY
1981/82
MY
1982/83
August 1983-
May 1984
Total 6,321
6,567
5,207
5,894
China, Mainland 947
847
20
12
European
Community
454
538
559
749
Japan
1,233
1,626
1,286
1,448
South Korea
1,251
1,412
1,322
1,059
Taiwan
499
777
378
448
Thailand
211
167
197
222
USSR
NEGL
0
192
269
1,055
671
827
1,173
2,078
2,097
1,652
2,055
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13 July 1984
of Agriculture analysts anticipate that part of the
export decline-approximately 400,000 bales-will
result from increased Chinese cotton exports. 0
China must
consistently produce exportable surpluses and learn
international merchandising before becoming a
major threat. Although several market analysts
believe this will take until the end of the decade,
others expect it to occur sooner.
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Shrinking Export Market
for Jet Combat Aircraft
Rapidly expanding exports of jet combat aircraft in
the last 10 years have allowed nations with limited
domestic markets-such as Italy, France, and
Great Britain-to enhance their production capa-
bilities and. manufacture fighters using sophisticat-
ed technologies. Since 1973, nearly 13,000 jet
fighter and training aircraft have been exported.
Now, however, large inventories, serious foreign
exchange constraints by many potential buyers,
and the high cost of new jet fighters suggest that
export demand for aircraft will decline by one-third
in the 1984-93 period compared with the previous
10 years. European aerospace firms already are
cutting back, and it has become more difficult for
Third World producers to get started
frontline states of the Arab-Israeli conflict to
modernize and, except for Egypt, to expand their
inventories.
? The massive increases in oil prices in the early
1970s, which allowed OPEC countries to pur-
chase large numbers of aircraft. The air forces of
OPEC nations have more than doubled since
1974 from 800 to 1,900 fighters in 1983. In
addition, Arab OPEC countries financed aircraft
purchases by other Arab states. 25X1
The Next 10 Years:
The Declining Export Market
The Export Market: 1974-83
The export market for jet combat aircraft grew
dramatically during 1974-83. Worldwide inven-
tories of exported jet fighters expanded 40 percent,
and jet trainer inventories grew almost one-tenth.
Third World nations imported nearly four-fifths of
the more than 10,000 jet fighters and about two-
thirds of the 2,600 jet- trainers/light attack aircraft
exported during that period. The United States and
the Soviet Union led suppliers, providing 80 percent
of all jet fighters exported. Czechoslovakia was the
primary exporter of jet trainers, providing about 35
percent of these comparatively inexpensive subsonic
aircraft. We estimate that the value of these sales
totaled about $73 billion.
The sharp increase in demand for aircraft during
the period resulted from:
? War and regional tension, which led North and
South Korea, Vietnam, Pakistan, India, and the
We expect a much smaller export market for jet
combat aircraft during the 1984-93 period. Discus-
sions
indicate that the export demand
for new fighters will drop by about 40 percent from
the preceding 10 years. Barring substantial combat
losses, we estimate that about 4,300 jet fighters will
be ordered by the mid-1990s, in addition to the
nearly 2,000 currently on order.2 We estimate that
the global export demand for jet trainers and light
attack aircraft-will approach the 2,500 level, ap-
proximately the same as the preceding 10 years.
We believe sales of jet trainers could be even higher
if buyers purchase these less costly aircraft to meet
missions previously reserved for fighter aircraft.
Programs to extend the life of existing aircraft
provide one attractive alternative to purchasing
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2 Replacement figures assume a 20-year operational life for jet
combat aircraft in nonconflict situations. Therefore, fighters and jet
trainers procured in the 1960s and early 1970s will need to be
replaced by the early 1990s. Normal aircraft attrition rates 25X1
are also factored into our 25X1
estimates
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Secret
DI /EEW 84-028
13 July 1984
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Recipients of Exported Jet Combat Aircraft, 1974-83
East Asia-5.5N
Sub-Saharan
Africa-6.7
Persian Gulf-5.4 .
South Asia-6.0-
Southeast Asia-
North Africa-
Levant-25.0
14.8 Sub-Saharan-
Africa-8.1
Third World- Latin America-15.4
68.4
Suppliers of Exported Jet Combat Aircraft, 1974-83
China-6. `
France-6.9 II
US-34.4
China-3.6-] LUhhitedKingdom-3.0
USSR-6.9
Czechoslovakia-
36.2
Secret 28
13 July 1984
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Secret
Estimated Minimum Value of Initial
Combat Aircraft Sales Agreements
by Supplier, 1974-83
Billion US $
Percent of
Total Sales
Total Weapon
Sales
Combat Aircraft
Sales a
Total
318
73
23
USSR
87
26
30
United States
124
30
24
France
34
10
29
a Estimated value for initial aircraft sales only. Follow-on contracts
for maintenance, spare parts, and consumables are not included,
because data are incomplete.
of indigenous industrial capabilities. National pro-
grams will have the greatest effect on the jet
trainer/light attack market as nations replace ag-
ing equipment with domestically produced planes.
According to
Brazil, Argentina, India, Israel, Romania, and
Yugoslavia will fly prototypes of their own jet
combat aircraft before the end of the'1980s.
Impact of a Shrinking Market
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new aircraft. The modernization of existing fighters
allows national air forces to enhance capabilities
without enduring the high costs and logistic compli-
cations associated with introducing a new aircraft
into their inventories. Such programs concentrate
on improving the power plant, avionics, and weapon
delivery capabilities. For example, Israel, West
Germany, Japan, and Great Britain are planning
improvements to their F-4s
The emergence of indigenous jet combat aircraft
production programs in the Third World also could
affect export sales over the next 10 years.' While
the unit costs of aircraft produced in developing
countries are usually high, this option remains
attractive because of increased employment, possi-
ble foreign exchange savings, and the development
' Our estimates of the jet combat aircraft market assume that
indigenous production programs currently under way will succeed
in order to meet national air force requirements. Failure of these
programs, however, would open export possibilities for other suppli-
ers.
We believe emerging suppliers will at best make
only limited inroads into the jet combat aircraft
export market over the next 10 years. For instance,
Israeli export efforts could be hampered by the
extensive use of US components in their aircraft.
Power plants and other subassemblies produced
under US license will remain under US export
restrictions. Exports of aircraft manufactured by
new producers also will be adversely affected by the
high costs of their less sophisticated products.
Secret
13 July 1984
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Jet Combat Aircraft Programs
in Developing Countries
Aircraft Primary Planned
Mission Deployment
Date
Argentina IA-63 Trainer/light 1987
attack
such as India and Yugoslavia, have also encoun-
tered problems that will increase their aircraft's
unit prices.
We believe a desire to retain design teams and a
general slowdown in West European fighter pro-
duction, also are driving efforts to codevelop a .
poor export performance of the Mirage 2000 has
helped persuade French industrialists to seek coop-
erative development to sustain France's fighter
aircraft industry. Great Britain, West Germany,
and Italy also recognize the financial constraints of
national programs and favor codevelopment.
Secret
13 July 1984
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